Boom in Production of ‘Technological Barrels’ of Oil Drives Prices Down

A debate is going on in the oil industry and among its consumers about the medium- to longer-term impact of North American shale oil and Canadian tar sands on the oil price.

While oil from less conventional sources like this has flooded the market, particularly impacting North America and driving down both imports and prices, they remain technologically more complicated to extract.

Nevertheless, these technological barrels of oil are predicted to make up roughly 65% of non-OPEC oil production capacity growth until 2018, according to the IEA as quoted in the FT, while North America is forecast to make up some 40% of incremental oil production capacity growth over the next five years.

Clearly these technological barrels are looking to have a significant impact on global oil supply and prices – which, in turn, affects metal prices.

Indeed, some feel the impact will drive prices lower during this decade, Dennis Gartman, a pundit followed by many investors, is quoted in another article as saying to CNBC this week: “If there were a way to sell OPEC short, I would try to find a way to sell OPEC short.”

If that is the case, a lower oil price could have a profound impact on the global economy, boosting growth and demand for metals. In addition, the price of many energy-intensive metals like aluminium react to a fluctuating oil price – gaining support from rising oil prices and falling with lower oil prices – even though electricity is rarely produced directly from oil.

The industry -has been caught between rising output and weak global demand, at least from mature markets, which has resulted in a lower oil price. However, rising production costs are prompting analysts to examine the true cost of production, particularly for new sources of “technology barrels.”